Low interest rates and farmland

Low interest rates should help farm balance sheets thanks to their role in higher values of farmland. Federal Reserve Chairman Ben Bernanke announced last week that he wouldn’t raise short-term interest rates until mid-2013.

“The low interest rate environment that exists today is one of the reasons farmland prices have appreciated,” said Scott Stiles, Extension economist for the University of Arkansas Division of Agriculture. “Over the last decade average land values have doubled and since 2004 they are up 40 percent.”

Stiles said the surge is due to both high commodity prices and low interest rates.

“Investors looking for a place to park money see land values growing 6 to 8 percent a year.” Particularly with CD, checking and savings interest rates struggling along at a fraction of 1 percent, “that’s a great return compared to other investments. They also see the tremendous income potential from farmland with today's historically high commodity prices.”

Stiles said there is a lot of debate as to whether farmland prices are in a bubble, similar to the real estate market a few years ago. A prolonged period of low interest rates should ease that concern.

With the cost of borrowing so low and nervousness on Wall Street and among consumers, investors are likely to continue to be interested in farmland investing as opposed to the equity markets.

Farmers have good news in the commodity markets too. USDA confirmed last week that corn and soybean inventories will remain tight over the next 12 months, keeping crop prices at historic highs.

“The near-term outlook is positive for crop producers and farmland investors,” Stiles said. “Both parties are looking at historically high commodity prices at least over the next year and historically low interest rates on crop loans, equipment and real estate loans.

“With the economic concerns, crude oil has pulled back to the mid-$80 level, reducing input costs. However, it is likely that land cash rents, seed, chemical and fertilizer will remain a follower of the high corn and soybean prices.

“Low interest rates will help reduce the cost of purchasing inputs with working capital loans and credit lines,” Stiles said, adding that continued low interest rates will also support land values and in turn, farm balance sheets.

For more information on agricultural economics, contact your county agent or visit www.uaex.edu.